Replacement income levels generated by capital accumulation plans (CAPs) fell further in the fourth quarter of 2014, according to Eckler’s Capital Accumulation Plan Income Tracker (CAPit).

The drop, from 61% to 60%, was driven by the recent weak performance of the S&P/TSX Composite Index and the effect of lower interest rates on annuity values.

Read: Replacement income levels fall

Replacement levels fell about 4% throughout 2014, from a high of 64% to start the year. With interest rates expected to stay low throughout 2015, it’s more important than ever for CAP sponsors to understand the impact on their members’ retirement savings, says Janice Holman, a principal in Eckler’s Toronto office.

“Plan sponsors need to be asking themselves, ‘What does this mean for my employees’ ability to retire comfortably?’ and ‘What impact is that going to have on my business?’” says Holman.

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Historically, the financial industry has pegged the appropriate replacement income ratio at about 70%. But recent research suggests no single ratio applies to all Canadians. Rather, the key focus of a retirement saving strategy should be on ensuring individuals are able to maintain their lifestyle into retirement.

“What that looks like is going to be completely different from person to person, and it may take less than 70% for many employees,” says Holman. “Plan sponsors need to understand and monitor the retirement readiness of their specific member population in order to develop strategies to help them reach replacement income levels that will work for their needs. That’s the best way to ensure your CAP meets its goals.”

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